Nordics Economic Outlook December 2016

Nordics: Economic Snapshot for the Nordic Economies

November 23, 2016

Denmark: Indicators for recent months do not paint a bright picture of the Danish economy: industrial production collapsed in September and business sentiment was downbeat in October, falling to a 15-month low. Nonetheless, Denmark has continued its moderate recovery in 2016, with private consumption as the main driver. A strong labor market and growing disposable income thanks to low inflation are behind the steady expansion of household expenditure. In the political arena, the budget for 2017 got approved by Parliament on 18 November. The fiscal plan foresees moderate tightening, though revenues are subject to volatile factors such as pension yield tax revenues and North Sea oil and gas extraction.

Finland: The recovery in Finland’s decade-long stagnant economy gained traction in the third quarter. According to preliminary data, quarter-on-quarter GDP growth picked up from Q2’s flat reading to 0.5% in Q3, which was the strongest reading in over a year. This was likely driven by the domestic economy, with low inflation fueling strong household spending and fixed investment benefiting from improved domestic conditions. A rebound in industrial production growth in September and strong consumer confidence in October, which hit its highest level since April 2011, confirm the upbeat momentum. On a less positive note, the unemployment rate, which had fallen for three consecutive months, rebounded and rose notably in September. Nevertheless, the authorities’ efforts to reduce rigidity and increase competitiveness in the labor market have proven effective in tackling structural deficiencies and are likely to boost exports in crucial Finish industries, namely technology and forestry.

Norway: Norway’s economy contracted on a quarterly basis in Q3 on the back of stagnant private consumption and a steeper decline in oil-related activities and shipments. The Nordic country, with its large offshore drilling industry, has been struggling from low oil prices, which has prompted oil companies around the globe to slash investment. While the situation offshore is looking bleak, the mainland economy appears to have left the worst behind as it grew marginally from the previous quarter in Q3. The government is making efforts to alleviate some of the strain with fiscal stimulus, in spite of the shortfall in revenues from petroleum extraction. The IMF concluded its Article IV mission on 17 November and assessed the 2017 fiscal budget as appropriate, but emphasized the need to improve mobility within the labor market as the number of oil-related workers in Norway is seen reducing in the longer term.

Sweden: The Swedish economy is continuing to fare well so far this year, posting positive economic tendency indicators in the three months to September after solid GDP growth in H1. Recent indicators for industrial production have sent conflicting signals about Sweden’s economic performance, but low unemployment and inflation likely gave a boost to private consumption in Q3, after its weak performance in Q2. Additionally, the economic tendency survey data for October was at its highest level since February, signaling improved sentiment in the business environment in the last quarter of the year.

Iceland: On 29 October, the eurosceptic Independence Party won the most seats in the snap parliamentary elections that were called after the prime minister was forced to resign due to a scandal related to the Panama Papers. However, the party was ultimately unable to form a coalition government after failing to find common ground with other parties over fishing quotas and EU membership. The president is now expected to ask the Left-Green party to form a coalition. Left-Green leader Katrín Jakobsdóttir will likely try to form a center-left government, which would include the anti-establishment Pirate Party. While Iceland’s economy has been doing well so far this year—it expanded 3.7% in Q2 and 4.4% Q1—the current political gridlock poses a risk to its healthy trajectory.

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Denmark: Growth in 2017 should see a moderate acceleration after last year’s subdued expansion due to weak export growth, as oil shipments, close to 7% of Denmark’s merchandise exports, were hampered by low energy prices.